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Sharing bankruptcy news with employees

On Behalf of | Aug 3, 2023 | Business Bankruptcy, Chapter 11, Chapter 7 |

When you decide to file for bankruptcy to avoid further debt or reorganize your business, you are required to inform your employees, which will likely cause specific concerns. It’s important to understand the best methods to share this news with your employees and to anticipate questions they may have.

What you should share

While you should inform your employees of your company’s bankruptcy status, you are not obligated to share all your organization’s financial details. Be direct and clear about your intentions for the company’s future, and show empathy for your employees, as they may be uncertain about their way forward.

It’s best not to make any promises, but you may choose to offer a timeline based on the information you have received from your legal team.

Possible impact on employee wages and benefits

First and foremost, employees will likely be concerned with their wages. They will also wonder about their benefits, including retirement and health insurance. Depending on the type of bankruptcy, you can candidly explain whether or not they can expect continued work with your organization.

If your company is filing for Chapter 7 bankruptcy, your organization will be liquidated, and all assets will be distributed to your secured creditors first, followed by all of your unsecured debts. In general, employee wages fall under unsecured claims. It will not be within your control to ensure that your employees are paid from the company’s assets, but their claims will be noted and given due consideration.

Under Chapter 11 bankruptcy, employee wages and benefits will remain a priority for employees who retain their positions. In order to restructure and become financially viable, your company may need to lay off employees. Any employees who are laid off should have the opportunity to become creditors in the bankruptcy process and may receive priority over other unsecured claims for any wages, vacation pay, and severance accumulated before the bankruptcy.

Either way, any employee who is laid off during your bankruptcy should be encouraged to file a claim in order to receive their dues as creditors.

As all businesses filing for bankruptcy must work with an attorney, you will have the opportunity to get advice regarding the specific impact on your employees. Based on your attorney’s recommendations, you can then share pertinent information with your team. It may be a difficult conversation, but it’s important to speak respectfully and honestly to benefit everyone involved.